Small Business Loans Decline in October

Nov. 10, 2004--Small Business Administration loans fell significantly in October after loan fees went up to start the month, but opinions differ about whether the decrease indicates an alarming trend or a statistical anomaly.

Rep. Nydia Vel á zquez (D-NY), the ranking Democrat on the House Small Business Committee, cited SBA data showing that the average daily volume for its 7(a) loan program dropped 26% to $51 million per day in October from $69.1 million the previous month. Vel á zquez said that if current loan levels persisted for the remainder of the year, the 7(a) program would make only $10.5 billion in loans for the year, down $2 billion from earlier estimates.

She blamed the drop on the higher fees that took effect on October 1, resulting in increased costs that she estimated at approximately $1,500 to $3,000 per loan.

"The 7(a) program was created as a public-private partnership, leveraging the private sector's network of lenders and its knowledge of local business communities with the federal government's ability to mitigate risk," Velázquez said. "In operating this program-- which provides 30% of all long-term small business financing--the costs were shared by the lenders, small businesses, and the federal government. With the Bush administration's decision to raise the program's fees in October, they have decided to eliminate the federal government's historic support of this program and shift the entire cost of the program to small businesses and local community lenders. This cost increase will make the program more costly to small businesses and lenders alike, ultimately undermining the program's attractiveness and popularity."

The Small Business Administration countered that the extent of the decrease was misleading, arguing that the September numbers were inflated by an unprecedented surge in last-minute loan applications in anticipation of the October fee increase.

"There were so many loans in September that we couldn't even process them all by the end of the month," said SBA spokesman Mike Stamler. "If you just take average numbers from one of our busiest weeks ever and compare them to numbers on a slow day two weeks later you create a false picture."

Stamler said this September was the biggest month in terms of SBA loan volume in at least three years and that September is historically much busier than October, adding that SBA loans last month still outpaced October figures for each of the previous two years. He estimated that the increased fees caused related costs for an average SBA loan--about $160,000 at a 6% interest rate--to double to $2,400. But he added that since many borrowers finance that fee, it would end up adding less than $7 a month over the life of a 10-year loan.